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COMPANY OF THE DAY : MEDTRONIC

Medtronic is set to complete the acquisition of Covidien by early next year as it has received all the required antitrust clearances from about a dozen countries. The only approvals pending are from the Irish government, where Covidien is based, and the companies' shareholders. Shareholder approval is expected to be granted on January 6, when the shareholder meetings are scheduled to be held.

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FORECAST OF THE DAY : APPLE WATCH UNITS SOLD

We estimate that Apple will ship a total of around 18 million units of the Apple Watch when it launches in 2015. We expect shipments to rise to about 33 million units by 2021. Given that the watches will be tethered to an iPhone, it is useful to look at Apple Watch sales as a percentage of iPhone shipments. We estimate that about 10% of iPhone buyers will purchase the watch in 2015, increasing to about 15% by 2021 as the use cases for the watch improve and pricing declines.

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Where Are Oil Prices Headed In The Long Run?
  • By , 12/17/14
  • tags: XOM RDSA CVX BP PBR COP APC EOG CHK
  • Global benchmark crude oil prices have declined sharply this year on slower demand growth and rising supplies. The growth in demand for crude oil has slowed down significantly this year due to moderating economic growth in emerging markets, such as China and India, and a slower than anticipated economic recovery in the Euro-zone. In China, the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. As a result, the International Energy Agency (IEA) expects the growth in global oil demand this year to hit a 5-year low. It expects demand, which stood at around 91.7 million barrels per day last year, to increase by just around 0.7 million barrels per day this year. For next year, the agency expects demand growth to be a bit higher, around 0.9 million barrels per day, but still less than the growth in supply from non-OPEC countries, which is expected to be around 1.3 million barrels per day. The price of front-month Brent crude oil futures contract on the ICE has declined by more than 48% since hitting a short-term peak of $115/barrel in June this year and is currently trading around $59/barrel. In this analysis, we discuss the key factors driving global crude oil prices and our view of how they could trend in the long run. Slower Demand Growth Before we discuss the current slowdown in demand growth for crude oil, it is important to understand what makes up crude oil demand. Crude oil is used by the refining and chemical industries to manufacture petroleum products for transportation and industrial uses. These petroleum fuels primarily include gasoline, diesel, jet fuel, kerosene, and fuel oil. They make up almost one-third of the global energy demand. More than 55% of the global demand for petroleum fuels comes from transportation. The remaining 45% of demand comes from industrial and power generation sectors with the latter contributing just around 5%. Most of the growth in demand for these fuels is expected to come from the transportation sector. This is because the global demand from industrial and power sectors is expected to remain largely stable in the long run, as the growth in demand from developing nations is expected to be mostly offset by the decline in developed nations. However, growing economic activity and vehicle ownership in the developing nations is expected to drive significant growth in petroleum fuel demand for transportation, which would be partially offset by improvements in vehicle fuel efficiency and the growing use of alternatives such as natural gas and biofuels in the transportation sector. Transportation accounts for more than a quarter of the global energy demand. Liquid petroleum fuels including gasoline, diesel, and jet fuel currently meet almost all of this demand. Growth in economic activity and population along with vehicle fuel efficiency are the some of the key drivers for global transportation energy demand. While the demand for petroleum products has been consistently declining in developed economies, primarily due to vehicle fuel efficiency improvements, it has remained buoyant because of increasing economic activity in emerging markets. According to our estimates, the BRIC nations (Brazil, Russia, India and China) contributed almost 85% to the net growth in global crude oil consumption between 2008 and 2013. However, over the last 2-3 years, the growth in economic activity in these countries has slowed down significantly. For example, China’s GDP, which grew at 10.4% in 2010, expanded by just 7.7% last year and the IMF expects the slowdown to persist in the medium term. Similarly, India’s economic growth has also slowed down from 10.3% in 2010 to just 5% last year and it is expected to improve only marginally this year. This moderation in emerging markets’ growth and persistent weakness in the Euro-zone has led the growth in global crude oil demand to hit a 5-year low of around 700 thousand barrels per day (MBD) this year. Rising Non-OPEC Supplies and Diminishing Pricing Power of the Cartel The production of crude oil from non-OPEC (Organization of Petroleum Exporting Countries) countries has increased sharply over the past few years, primarily because of the spectacular growth from U.S. tight oil production. According to our estimates, more than 85% of the net increase in global crude oil production between 2008 and 2013 has come form non-OPEC countries. Almost all of this increase could be attributed to the growth in tight oil production in the U.S., which has been phenomenal to say the least. From almost nothing in 2005, the country’s crude oil production from horizontal drilling of relatively impervious rocks has grown to around 4 million barrels per day (MMBD) currently and the outlook remains positive, as the EIA expects the U.S. to produce more than 25 billion barrels of tight oil over the next 30 years. Apart from the U.S., Canada’s crude oil production growth outlook is also quite robust. Thanks to abundant oil sands reserves, the country’s total proved reserves currently make up more than 10% of the global proved reserves. This makes it the third largest source of future crude oil supply after Venezuela and Saudi Arabia. The EIA expects crude oil production from Canada to grow at 1.8% CAGR in the long run. On the other hand, the OPEC’s price controlling power has been severely restricted over the past few years because of internal conflicts and rising government spending by the member states. For example, Saudi Arabia’s crude oil export revenue, which traditionally exceeded the amount required to fund its government expenditures, enabling it to vary production levels in response to global supply or demand developments in the past, could now fall significantly short of its government expenditures if crude oil prices persist at current levels for very long. This is primarily because the Saudi government has substantially expanded its social and economic programs recently in order to diversify its economy and improve living standards. It plans to spend around $228 billion this year, up by 4.3% over last year. The IMF estimates indicate that the Kingdom would need to sell its crude oil at an average price of around $106/barrel in order to balance its fiscal budget. Therefore, despite the fact that Saudi Arabia maintains large financial reserves, revenue needs have become a more important consideration for the government before it responds to a situation of a steep decline in crude oil prices – like the one seen most recently – due to faster supply growth or a sustained downturn in demand. This was reflected in the OPEC’s decision last month to maintain its production target for the first half of next year despite the recent decline in crude oil prices. Rising Finding, Development and Production Costs On the cost side of things, the fact that finding and developing crude oil reserves is getting increasingly difficult has manifested itself quite profoundly on the financial statements of the world’s largest oil and gas companies over the last few years. According to the latest oil and gas reserves study published by EY, finding and development costs that include costs associated with unproved property acquisition, exploration, and development of proved reserves, increased at more than 14% CAGR between 2009 and 2013 to $22 per barrel of oil equivalent (BOE). Similarly, production costs, which include production taxes, transportation costs, and production-related general and administrative expenses, also increased at more than 14% CAGR between 2009 and 2013 to $19.60 per BOE. We expect the trend to continue in the long run, primarily because most of the growth in future crude oil production is expected to come from higher marginal cost areas like tight oil in the U.S., oil sands in Canada, and pre-salt reserves in Brazil. Our Estimate We believe that at the heart of the recent volatility in crude oil prices is the sharp increase in non-OPEC supplies relative to the overall demand growth. In order to substantiate this argument, we looked at the correlation coefficient between the annual change in global crude oil demand adjusted for the increase in non-OPEC supply and the change in Brent crude oil prices since 2004. We found the two variables to be highly correlated with a correlation coefficient of 0.8. Statistically, this implies that the spread between global demand and non-OPEC supply growth explains around 64% of the overall volatility in crude oil prices. While we agree that correlation does not imply causation, the behavior in oil prices relative to the estimated demand-supply spread does make intuitive sense. For example, as the chart below highlights, when non-OPEC supply growth exceeded the growth in crude oil demand by 1.6 million barrels per day in 2009, crude oil prices fell by almost 37%. Similarly, oil prices increased sharply by almost 29% in 2010 as the growth in demand exceeded non-OPEC supply growth by 1.8 million barrels per day. We currently base our long-term crude oil price forecast on a linear regression model, which assumes that the strong correlation between the two variables described above will continue to hold in the long run. Based on this approach, we expect annual average crude oil prices to continue to decline in the short to medium term and bottom out by 2017 to reach $100 per barrel by 2020. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    CRM Logo
    Salesforce Releases Product That Lets Businesses Create Custom Enterprise App Stores
  • By , 12/17/14
  • tags: CRM SAP ORCL MSFT IBM
  • Salesforce.com (NYSE: CRM), the world’s leading CRM software vendor, has rolled out a new product that allows enterprise users to build their own app stores. Its “AppExchange Store Builder” is an easy to use platform that lets companies build customizable app stores for managing and delivering apps to end-users. The new product is free for existing Salesforce licensees and costs $5 per month for users that don’t have a Salesforce license. In this article, we analyze this product category, its market and what it means for Salesforce. See our full analysis for Salesforce.com First Mover’s Advantage May Give Salesforce a Competitive Edge An increasing number of enterprises are using private marketplaces to deliver pre-approved apps to employees, customers and partners. This allows them to gain direct access to users, thereby bypassing public marketplaces like Google’s Play Store and Apple’s App Store. The enterprise app store is not a new concept and has been around since as far back as 2011, but Salesforce is the first major player to create a common platform and release it ready to use for individual businesses. Until now, such private marketplaces were developed and used in-house by corporate giants like Cisco (NYSE: CSCO) and Symantec (NYSE: SYMC), or were used to deliver specific apps to end-users like in the case of SAP (NYSE: SAP). Salesforce’s new AppExchange Store Builder allows businesses to create customized app stores with their own branding and allows the inclusion of in-house, company-specific apps as well as commercial, publicly available apps. An important feature is that app stores built using this platform can be used on desktop, mobile as well as web-based devices, thereby ensuring across-the-board uniformity. Other than Salesforce, currently only a handful of startups provide such customizable enterprise app stores, chief among them being Apperian. BYOD Culture to Necessitate Need for Enterprise App Stores The AppExchange Store Builder gives Salesforce a first-mover’s advantage in a nascent product category that is set to witness a boom in the near future. With the advent of Bring Your Own Device (BYOD) culture, it is expected that by 2016, 38% of companies will allow employees, business partners and other users to use their personal devices for executing enterprise applications. This creates a need for regulation of apps that can be downloaded, installed and executed by end-users in order to ensure internal security and compatibility. Furthermore, end-users often have difficulty in finding in-house apps in public marketplaces and may be misled by fakes or apps with similar names. This problem can be circumvented by having a private marketplace which can be used to manage and deliver in-house as well as pre-approved commercial apps to the companies’ employees, customers and partners. Such enterprise marketplaces have potential added advantages of providing app-usage analysis, simultaneous rollout of updates for all users, and reduced administrative fallout from inadvertent download of unauthorized apps. This untapped demand is further reinforced by Gartner’s estimate that about 25% of enterprises are expected to have an enterprise app store by 2017. Considering the very limited number of companies that have the resources to build custom enterprise app stores from scratch, this presents a lucrative opportunity for introducing ready to use, customizable enterprise app stores. Monetization Given that the AppExchange Store Builder is currently being offered free of cost to existing customers, it will not have any impact on Salesforce’s top line. However, this may be an initial marketing strategy to kickstart adoption and the company may soon monetize this product. Such monetization may occur in the form of either offering the AppExchange Store Builder as a paid add-on, or including its cost in a larger product package. Additional features such as compatibility checks, security reviews and feature updates may be rolled out in the future at additional charge, further augmenting this revenue stream. Adoption of this platform may also be beneficial to Salesforce’s bottom line since it will facilitate smoother roll out of updates for apps across desktop, windows as well as web-based devices. However, long-term success of enterprise app stores is dependent upon adoption of a large number of apps by enterprises, which would increase the return on investment on creation of private marketplaces. We believe that the ongoing shift to mobile enterprise applications, as well as the emerging BYOD culture, will inevitably result in increased app adoption, thus underscoring the need for enterprise app stores. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    F Logo
    Four Reasons Why Truck Sales In The U.S. Might Increase In 2015
  • By , 12/17/14
  • tags: F GM VLKAY TM
  • Ford Motors (NYSE:F) will release an updated version of its best-selling F-150 truck for the year 2015. The new truck will have several changes compared to the earlier versions, including new engine options and an aluminum body. For the production of the new model, Ford invested more than $800 million at its Rouge center assembly plant and nearby Dearborn parts facility. Another $1.1 billion is being invested at Ford’s Kansas City facility in Missouri, where the company will cease the production of the current F-150 and close operations for a month around Christmas for the production of the new truck. Together, the two facilities are expected to produce 700,000 units in a year. The use of aluminum in the vehicle manufacturing process isn’t exactly novel. Ford itself has used aluminum in the manufacturing of lower volume models. The Ford GT used an aluminum frame space and body panel for a number of years. Other companies have used aluminum in their vehicles for years. The Jaguar XJ has used an aluminum uni body structure for about a decade, while Audi has manufactured about 750,000 vehicle units which use aluminum in their body parts in the 20 years over which they have used aluminum in their production process. However, the scale at which Ford plans to produce vehicles with aluminum bodies is unparalleled. Moreover, it is highly unlikely that consumers will purchase the new F-150 model just because of the new aluminum body. The obvious impact of the use of aluminum in the manufacturing process will only be to raise the cost of production of the car, since aluminum is at least two and a half times more expensive than steel. If the company decides to pass the higher cost of production onto the consumer, the average unit price of the F-150 will increase. Higher unit prices also mean higher insurance costs, and this is something consumers are quite likely to factor into their decision making process. The cost savings on fuel and maintenance will have to be greater than the increase in unit and insurance costs in order to sway the consumer. Trucks are money makers for automotive companies as truck models are high-volume and high-margin. The current economic environment is set up in  such a way that the pickup truck segment can become even more valuable. There are four main reasons for believing this: 1) A recovery in construction demand will also increase the demand for hauling vehicles: According to the builder’s confidence index, confidence among U.S. home builders is at a nine-year high. The housing market in the U.S. has gradually improved this year, helped by a drop in mortgage rates below 4 percent and a drop in unemployment levels to a six year low. Additionally, wages have picked up in real terms and gains in consumer sentiment are likely to support the continuation of this momentum into the next year and beyond. As builder confidence increases and more houses, institutional developments, and major infrastructure projects are brought into existence, the demand for construction related equipment also increases. Hauling vehicles, such as pickup trucks, form a significant part of this ancillary industry. Consequently, we can expect an increase in pickup truck sales over this period. 2) The decrease in gas prices supports truck sales : Gasoline prices have declined by over 20% through the course of this year, as a result of the global collapse in oil prices. Cheaper gasoline is good for the pickup truck industry and the decline in gas prices has seen the sales of SUVs, crossovers, and pickup truck sales increase over the course of this year. In the month of November, pickup truck sales increased by more than 10% compared to last year, while SUV sales increased by 10.3%, and crossover sales increased by 9.5%. On a year-to-date basis, total SUV and crossover sales have increased by as much as 11.7%, while pickup truck sales have increased by 5.4%. It is difficult to know just how long low gas prices will persist and how long consumers expect them to persist. This is dependent on the economics of oil and on geopolitical considerations but as long as gas prices stay low, the sales of these categories in the auto industry are likely to keep going up. 3) Near-record age of the average U.S. vehicle : According to an annual study by IHS automotive, the average age of around 250 million cars on the road in the U.S. is at an all time high of 11.4 years. This is far higher than the usual average of 7-8 years. Although, IHS automotive predicted the average age to increase to 11.5 years by 2015 and 11.9 years by 2019, it can be argued that the increase in average age of these vehicles is simply an aberration brought about by the weak economic environment and falling real wages. Given the improvements in economic activity and the drop in unemployment levels, it possible that this trend might reverse. If that happens, a number of consumers in the U.S. could be lining up to replace their older vehicles with newer models. This eventuality would also result in a bigger market for pickup trucks. 4) Low interest rate environment : The U.S. Federal Reserve is likely to retain its low interest rate policy until at least July 2015. In 2013, the Federal Reserve announced a reduction in bond purchases, which had kept the long-term interest rates low. The Fed has targeted short-term rates of between 0-0.25% since December 2008, and plans to keep them there for some time after it ends its bond-buying program in the fall of 2014. The Fed’s low rate policy might discourage auto companies from raising lending rates significantly. Additionally, with consumer demand weak for other types of loans and banks flush with huge amounts of money to lend, competition has increased as interest rates on car loans have fallen to the lowest levels since 2008. We have a $20 price estimate for Ford, which is about 35% higher than the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    TI Set To Showcase A Range Of Consumer Devices At The 2015 CES
  • By , 12/17/14
  • tags: TXN QCOM INTC BRCM
  • In a press release this week,  Texas Instruments (NASDAQ:TXN) announced that it is enabling the newest consumer products on display, ranging from next-generation advanced driver assistance systems (ADAS) to innovations for the Internet of Things (IoT) and wearable technology, at the upcoming 2015 International Consumer Electronics Show (CES) next month. The company, in collaboration with its technology partners, will showcase over a hundred product demonstrations at the event. Since  its exit from the smartphone and tablet market in September 2012, TI has been focusing on transitioning its operations to become a pure analog and embedded processing company, segments that it believes will offer long-term growth and less volatility compared to the past. With a market share of 17%, TI is one of the leading players in the analog semiconductor market and derives around 60% of its revenue from this division. On the other hand, the company derives only 20% of its revenue from the embedded division. However, the fast expanding embedded market offers significant growth opportunities for TI. TI has considerably expanded its embedded product portfolio over the past year. In August this year, the company announced that it has shipped more than 15 million ADAS System-on-Chip (SoC) devices so far, confirming its leadership position in the automotive market. The automotive segment is a large market and is going through a transition to more compute-intensive electronics systems. Specialty Analytics expects the market for ADAS to be worth around $15 billion by 2016, with a CAGR of 23%. TI is also focusing on expanding its footprint in microcontrollers, a segment where it is currently under-represented. (TI has a  6% market share in microcontrollers). Microcontrollers are general purpose, low-cost integrated circuits which are used in a wide range of applications requiring an automoated control function. According to Grand View Research, the global microcontroller market is expected to reach   $27 billion by 2020, driven by growing demand from industries, such as automotive and consumer electronics, and the advent of the Internet of Things (IoT) coupled with declining microcontroller prices.(Read:  TI’s Future Growth Likely To Get A Boost From An Increasing Focus On Microcontrollers ) This year, the company launched two new variants of its Hercules microcontrollers, which offer a 50% increase in computational performance over any of TI’s current MCUs, for industrial, medical, automotive and transportation design applications. With increased investments in this growth area over the past few years and new product launches, TI continues to expand its embedded portfolio every quarter. TI’s embedded processing division reported its eighth quarter of consecutive year-on-year growth in Q3 2014 (reported on  October 20th) as the company’s investment over the past few years in strategic areas yield favorable results. We expect the addition of new products to its portfolio will help TI retain its market share in embedded devices over our review period. Our price estimate of $42 for TI is at an approximate 15% discount to the current market price. See our complete analysis of Texas Instruments here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
    LULU Logo
    How Low Crude Oil Prices Are Good For Lululemon
  • By , 12/17/14
  • tags: LULULEMON LULU UA NKE
  • Late last week, crude oil prices fell below the $60 per barrel mark for the first time in more than five years, putting downward pressure on the stocks of a number of businesses closely related to the energy sector. However, falling oil prices are not bad for all companies. Consider the case of yoga-based apparel manufacturer and distributor Lululemon Athletica (NASDAQ: LULU) We have a $40 estimate for Lululemon, which is about 20% below the current market price. A significant amount of Lululemon’s products are made from the company’s trademarked Luon fabric. It is hard to estimate just how much of Lululemon’s product is Luon based with much precision, but in order to guess it is useful to consider the incident from 2013 when the company recalled its black Luon bottoms due to supply chain issues. Later, the company revealed that the product alone represented about 17% of all bottoms in its stores. This does not even include other Luon-centric bottoms, tanks, tops, and jackets that the company also offers. While the knit variety in which Luon appears in the finished product can vary from product to product, it’s comprised of 5/6th Nylon and 1/6th Lycra, both of which, at their bases, are derived from crude oil. As a result, cheaper crude oil should translate into a cheaper cost of raw materials used in its products, implying a cheaper cost of goods sold and a higher gross profit. In this way, cheaper oil prices will have a direct positive impact on the company’s cash flows. They can also have an indirect impact on the company’s profitability as well: manufacturing the product is only one part of the business. The product also has to be transported to the company’s stores from its factories. A significant cost for any apparel based company is the cost incurred in the transportation of its products. A reduction in petrol, diesel, and gas prices should also translate into lower freight and transportation costs for the company. Additionally, a near 50% reduction in oil prices frees up more cash for consumers, who might decide to spend some of that cash on products like those of Lululemon. However, lower oil prices will take some time to work their way through the complete supply chain and to the company’s bottom line. When that happens, they will, at the very least, serve to offset the significant investments the company has been making to improve its supply chain in the wake of last year’s product recall. See our complete analysis for Lululemon Athletica here
    BKW Logo
    Can Burger King Make An Impactful Start In India?
  • By , 12/17/14
  • tags: BURGER-KING BKW MCD DNKN SBUX CMG
  • The American burger giant, Burger King (NYSE:BKW) reached another milestone in its path for international expansion, as the company opened its first store in India on November 9. The company opened its first Indian restaurant at a good location in the country’s capital, New Delhi, with a plan to open 12 outlets across Mumbai and New Delhi over the next 60-90 days. Burger King restaurants in India will be equipped with two product lines: vegetarian and non-vegetarian products — both with different managing staff. Burger King believes that India could become one of its largest international markets. However, Burger King is a late entrant in the country, with other restaurant chains such as McDonald’s (NYSE:MCD),  Dunkin’ Brands (NASDAQ: DNKN), and  Starbucks (NASDAQ: SBUX) already present in this crowded market for a long time now. Burger King India Pvt. Ltd. is a joint venture of Burger King Asia-Pacific and Everstone Capital, an India focused investor with dedicated private equity and real estate funds. Burger King had an excellent third quarter, with strong financial results and a major merger deal with the Canadian multinational fast-casual restaurant chain Tim Hortons (NYSE: THI) in August. This was the company’s best quarterly performance in terms of comparable store sales in North America since 2012, primarily driven by impactful new product offerings and the value menu. As a result, the company’s global comparable store sales rose 2.4% year-over-year (y-o-y). We have a  price estimate of $31 for Burger King, which is roughly 12% below the current market price. See full analysis for Burger King Vast Growth Potential In India Size Of Indian QSR market According to the National Restaurant Association of India (NRAI), the food service industry in India is a $48 billion per annum business (approximately INR 2,500 billion) with an expected annual growth of 11%, making it the third largest industry in the country. However, the Indian market is largely unorganized, consisting of street stalls, roadside vendors, and food carts, and it accounts for 70% ($33.7 billion) of the Indian food service market. The remaining 30% ($14.3 billion) is the organized market, which includes: Chain market (brands with more than 3 outlets), which accounts for 5%, or $2.5 billion, of the total food service industry in India. Licensed Standalone market (single licensed outlets paying taxes, with all required licenses), which accounts for 25% of the total food service industry in India. The organized market, or the Indian restaurant market, is expected to reach $26 billion by the end of 2015. This would mean that the organized sector would account for nearly 36% of the total Indian food service market. Brands such as  McDonald’s (NYSE:MCD), Yum! Brands, and now Burger King, fall under the chain market. Quick service restaurants (QSRs) accounted for 43% of the total chain market in 2013, and are expected to account for nearly 50% by the end of 2018. (Ref: 3) Among all the segments, QSR is outperforming in India and is outpacing the market’s projected growth. Indian Consumer Habits Drifting To Fast Food Over the last decade, a number of international chains have entered the Indian QSR market and have played an important role in the growth of the Indian restaurant industry. QSRs in India had an estimated market size of $1.06 billion in 2013 and their market is expected to grow at an annual rate of 25% to reach $3.2 billion by 2018. Burger King is planning to capitalize on this growth by opening its initial outlets in metro cities, such as New Delhi, Mumbai, Bangalore, and Kolkata. Metro cities offer a bigger potential customer base, due to more brand awareness, favorable environment, higher consumption, and a higher concentration of income in these cities. The international QSR brands, such as Taco Bell, McDonald’s, Pizza Hut, Dunkin’ Donuts, Dominos, and Subway revolutionized the QSR industry in India, with a wide variety of specialties in burgers, pizzas, sandwiches, tacos, and other beverages. According to the National Restaurant Association of India, an average Indian consumer eats out nearly 2 times a month, compared to 60 times a month in China. The Indian restaurant industry is driven by the younger population, who are driven towards popular national and international chains in the organized market. In 2013, McDonald’s was the highest selling fast food chain in India with a 40% market share among fast food chains, but held merely 2% share by value in the country’s total restaurant industry.The fact that McDonald’s holds only a small share while still being the industry leader shows that the market is highly fragmented, with a huge number of market players, including local restaurants. Moreover, this indicates that unlike consumers in the developed markets, such as U.S., Canada, and European countries, Indian consumers are not inclined towards a particular brand. The majority of Indians prefer ease and convenience with dishes with regional tastes and spices. Potential Competitors McDonald’s McDonald’s opened its first Indian outlet in 1996 when the fast food concept in India was not popular and eating out was restricted to local restaurants. Initially, the company had to face many challenges, such as adapting to Indian tastes and local food culture. However, by the early 2000s, the company managed to westernize Indian eating habits. One of the reasons why McDonald’s succeeded in India is its sensitivity to local taste and culture. A vast majority of Indian consumers do not prefer pork and beef. McDonald’s, which succeeded in Western markets because of its beef and pork products, altered its offerings and specifically tailored them for the Indian customers. McDonald’s India is restricted to chicken, fish, and vegetarian products. Secondly, McDonald’s, being the first of its kind, managed to attract Indian customers, by introducing value meals with local Indian spices and new innovative menu items, which are affordable for an average middle-class Indian. Moreover, the company strategically opened its outlets in metro cities, where people are more aware of the international brands and are more willing to pay extra money to try something new. Later on, the company penetrated into second and third tier cities and by 2013, McDonald’s had nearly 340 outlets in India. Finally, other innovative facilities, such as drive-thru and home-delivery in India, further attracted more customers. Being the global leader in the QSR industry, McDonald’s might pose a huge threat to Burger King in the long run. Yum! Brands In India, slightly behind McDonald’s are KFC and Pizza Hut, subsidiaries of Yum! Brands. The first KFC in India opened in 1995 and it suffered many protests regarding the consumption of meat products. Moreover, Pizza Hut completed 18 years of operations in 2014 and now has more than 130 outlets in India. Both the brands are planning to expand into second and third tier cities. Innovative international food items, such as pizzas and chicken wings, as well as additional conveniences, such as home-delivery, have strengthened the brand’s hold in the country. Domestic and Local Brands Despite a huge number of international brands flocking to the country, the middle-aged Indian population still prefers local cuisines with regional spices and dishes. Indian families prefer to eat together in a restaurant with local dishes, and mostly opt for fine dining restaurants. As we have seen, one-fourth of the Indian organized restaurant market is controlled by these domestic brands. Burger King’s Prospects In India In India, people with higher disposable income constitute a wide range of the population. Furthermore, with an improving Indian economy, disposable income for the middle class section of the society is improving, as well as the working population is increasing. This middle section of the society is the  primary target for Burger King. Secondly, with its brand appeal and its innovative tempting value meals, the company will find it comparatively easy to penetrate the market and might attract customers in huge numbers. Burger King’s model is strikingly similar to that of McDonald’s. The above mentioned reasons for McDonald’s success are fairly valid for Burger King as well. Burger King is also focusing on chicken, fish, and vegetarian items at affordable prices. However, the company is currently targeting metro cities and planning to make an impactful start. In a developing nation like India, the concept of fast-casual dining is not so prominent, unlike in the U.S. This is an added advantage for a fast food chain, as the fast food segment has been facing huge competition from the fast casual segment in the more developed markets. However, the company might find it difficult to attract those customers, who still opt for local restaurants. Indian families have a nuclear structure, with young people still living with their parents. When they eat out, families tend to go out together, and the decision for the choice of which restaurant is made by the elderly people, who compromise a demographic which has been relatively intransigent in changing their food habits. Moreover, it would be difficult for a new entrant to attract a wide customer base in India. With the passage of time, however, Burger King might be able to attract the budget minded Indian population with its value meals and sustain that customer base through new food offerings.  There is large potential if they are successful in this endeavor.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    AA Logo
    Alcoa Announces Acquisition Of Aerospace Components Manufacturer As Aerospace Expansion Continues
  • By , 12/17/14
  • tags: AA RIO X MT
  • Alcoa (NYSE:AA) has announced the signing of an agreement to acquire TITAL, a Germany-based producer of titanium and aluminum structural castings for aircraft engines and airframes. This acquisition will establish titanium casting capabilities in Europe for Alcoa, while expanding its aluminum casting capacity. TITAL counts several major European engine and aircraft manufacturers such as Airbus, SNECMA, and Rolls-Royce amongst its customers. Thus, the acquisition will enhance Alcoa’s customer base in the region. TITAL’s revenues stood at $96 million in 2013, with titanium products accounting for more than half of this number.  As per information released by Alcoa, TITAL’s revenues from titanium are expected to increase by 70% over the next five years. Titanium is increasingly becoming a material of choice for engine structural components for next-generation jet engine manufacturers. Titanium is a lightweight alternative to steel and can withstand extreme heat and pressure. Titanium components can boost energy efficiency and improve engine performance. The announcement of this acquisition is the latest in Alcoa’s efforts to expand its aerospace businesses. The company is betting heavily on the aerospace segment to drive the sales of its value-added products, as it looks to transform its product portfolio away from its commodity businesses. See our complete analysis for Alcoa Focus on the Aerospace Segment Alcoa is extremely bullish on the aerospace segment. It is banking upon aerospace to drive sales of its value-added products. The company forecasts 8-9% growth for its aerospace end markets this year. Alcoa projects a compounded annual growth rate of 7% through 2019 and a nine-year production order book at 2013 delivery rates for the commercial jet segment. The strong order book is also reflected on the jet engines side with 23,600 engines on firm order. For Alcoa, this represents sustained demand for its aerospace products for the medium term. Hence, it has significantly increased its exposure to the aerospace segment. In 2014 alone, several major developments in the aerospace segment have taken place for Alcoa. The company recently opened a $90 million manufacturing facility for the production of advanced third-generation aluminum-lithium alloys for the aerospace industry in Lafayette, Indiana. The company also announced the signing of a long-term contract worth $1 billion to supply aluminum sheet and plate products to Boeing. In July, the company announced the signing of a a 10-year agreement worth $1.1 billion to supply jet engine components to jet engine manufacturer Pratt & Whitney, a division of United Technologies Corporation (UTC). In June, the company announced the $2.85 billion acquisition of jet engine components maker Firth Rixson. Prior to that, it had announced a $25 million expansion of the Alcoa Power and Propulsion facility in Hampton, Virginia. The company had also announced the setting up of a $100 million facility in La Porte, Indiana, for the production of nickel-based superalloy jet engine parts. Alcoa also signed a long-term agreement worth $290 million to supply aluminum sheet to Spirit AeroSystems over five years. Spirit is one of the largest designers and manufacturers of aerostructures for commercial, military, business, and regional jets in the world. Alcoa’s aerospace revenues of $4 billion in 2013 accounted for around 17% of its total revenues for the year. With several recent developments in the aerospace segment, its share of the company’s revenues is set to grow at a rapid pace. Further, this fits in well with the strategic shift of the company’s product portfolio towards value-added products. The share of value-added products in the company’s overall sales stood at 52.1%, 54.4%, 55.7%, and 57.1% in 2011, 2012, 2013, and the first nine months of 2014, respectively. These figures are indicative of the company’s ongoing strategic shift towards value-added products. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    eBay's Business: Here Are The Key Drivers And Barriers (Part 2/2)
  • By , 12/17/14
  • tags: EBAY AMZN BABA
  • This article represents the second in a series of two notes we are publishing on eBay (NASDAQ:EBAY). In the previous article, we assessed the principal drivers in eBay’s business model. In this note, we take a look at the key barriers and challenges impacting eBay, and how they could hamper the company’s business in the future. We’d strongly advise our readers to go through the previous part before going through this article. The marketplaces’ segment is reeling under the pressure from traffic-related challenges, caused by the security breach and Google’s Panda update earlier this year. The security breach occurred during the first quarter, but went unnoticed until May 2014. As a safety measure, eBay had asked all its users to change their passwords – however, this caused a slowdown as buyers exercised caution in using the site at all. We believe the adverse impact of this breach could subside in the coming quarters, especially since no losses were incurred by users. Additionally, Google’s Panda update impacted eBay unfavorably, due to the unstructured and sparse charcter of many listsings, which accounts for much of the content on the site. Search engines bring substantial traffic on eBay’s sites, with organic search accounting for over 90% of this share.  We note that eBay is undertaking considerable changes to its SEO strategy to accommodate the Panda update.  However, we believe it could take a few more quarters to reap results, since it requires manual work to make the content accessible to search engines. These traffic-related issues have also hit eBay’s profitability, as the company has stepped up its sales and marketing efforts to curb the recent fall in traffic. We think its profitability could start improving in 2015, once other strategies start to pay off. The recent launch of Apple Pay has also caused significant tension among eBay’s investors – but we believe these fears are unfounded as they threaten only a very small share of PayPal’s revenue base. Stacking these barriers against the tailwinds we discussed in a previous note, we think that the market could be under-pricing eBay’s stock. We believe the long-term growth opportunities in both eBay’s marketplaces and payments businesses are strong, and the market seems to be over-weighting these headwinds in the present context. We reiterate our $67 price target for eBay’s stock, based on: 1) significant growth in the payments business, 2) improvement in the marketplaces segment, which generates high cash flows and margins; 3) an increase in shareholder value post the spin-off PayPal; and lastly, 4) more than $2 billion in the share buyback program. See our complete analysis for eBay Traffic-Related Challenges Due To Security Breach: The marketplaces segment is facing short-term traffic-related challenges, because of which its revenue growth slowed from 11% in Q1 2014 to 9% and 6% in Q2 and Q3, respectively. The security breach took place earlier this year and prompted the company to ask all users to change their passwords as a safety measure.  This led to a slowdown in buying activity, as some users did not change their passwords and avoided the site out of caution. It is important to note that this breach occurred somewhere in February or March, but went undetected until May. The company’s seller-created listings have been known to be affected with various security issues in the past as well. We think it could take a few more quarters before eBay is fully able to reverse the negative impact of this security breach. While financial information was not reported to be compromised, user data pertaining to names, passwords, phone numbers, address and birth details was most likely accessed by hackers. Since a large number of online users employ the same password for multiple sites, they had to modify the same across several places, creating unpleasant user experience. While buyers would remember this troublesome experience for a short period; over a longer time-frame, we believe this incidence will pass, and buyers will return to using the site as before. Mis-management of SEO Issue Has Also Contributed To Decline In Traffic: Another issue that has adversely impacted traffic on eBay’s sites includes changes in Google’s algorithms, that determine result rankings for keywords that users query on its search engine. Search engine queries (both paid and organic) are an important source of traffic for the company — these queries accounted for around 23% traffic (on desktop) on eBay.com during the last three months (according to SimilarWeb estimates). Organic search comprised for over 90% of this search traffic. In comparison, search queries were responsible for near-26% of desktop traffic on Amazon.com during the last three months, with organic search accounting for a whopping 95% of this traffic base. Google’s Panda update in May 2014 impacted eBay substantially, as the latter was punished for factors including inadequate content of its user-generated listings, poor management of paid search strategies, and other issues. As is widely known, Google accounts for the dominant share in the search engine market — Google sites comprised for around 67% share of the explicit core search market (on desktop only) in the U.S. in October 2014, according to comScore. Hence, the proper management of search engine optimization (SEO) protocols is imperative to benefit from this traffic source. However, SEO presents a peculiar problem for eBay considering there are millions of seller-generated listings on its platform, which leads to a large amount of unstructured data on its platform — rectifying this issue involves manual processes, which could take a few more quarters to show results. We believe it is essential for eBay to develop a more stable and long-term SEO strategy, since search engines are increasingly valuing quality-content as one of the top factors in their algorithms. Therefore, management must achieve a long-term solution to effectively managing data created by tens of millions of sellers to more fully leverage this source of traffic. Short-term Profitability Challenges: The recent traffic-related challenges have also impacted operating margins. In the below given table, we see that eBay has significantly increased its expenses on sales and marketing to curb the recent fall in traffic. Sales and marketing as a percentage of revenue increased by 100 and 180 basis points annually in Q2 and Q3 2014 respectively. Combined with recent surge in product development expenses, operating margin was seen at 17.9% in Q3 2014, as compared to 20.5% in a similar period a year ago. Key Metric (as a % of Revenue) Q1 2013 Q1 2014 Change Q2 2013 Q2 2014 Change Q3 2013 Q3 2014 Change Cost of Revenue 30.7% 31.7% 1.0% 31.2% 31.9% 0.6% 31.4% 31.9% 0.5% Sales and marketing 18.6% 18.9% 0.3% 19.9% 20.9% 1.0% 19.4% 21.2% 1.8% Product development 11.6% 11.3% -0.3% 11.6% 11.5% -0.2% 11.1% 11.7% 0.6% General and administrative 10.9% 10.9% 0.0% 10.8% 10.6% -0.2% 10.7% 10.2% -0.5% Other expenses 6.9% 6.6% -0.2% 7.1% 7.0% -0.1% 6.8% 7.1% 0.2% Operating margin 21.3% 20.6% -0.7% 19.3% 18.2% -1.2% 20.5% 17.9% -2.6% It is interesting to note that even after this recent decrease in profitability, eBay’s operating margin at 17.9% during the most recent quarter looks a much safer bet than Amazon’s operating margin of -2.6% . We expect the company to incur higher expenses on sales and marketing in the coming quarters as well, a factor that will weigh on its profitability. However, over the long-run, we expect the profitability to stabilize as we think eBay will be able to overcome challenges related to security breach and Panda update in the longer run. Rising Competition In The Payments Business From Apple Pay: The recent entry of Apple Pay in the mobile payments landscape is another barrier to consider for eBay’s investors. This service would enable iPhone users to utilize their mobile devices as wallets for undertaking transactions. The factors that worry investors include: 1) Apple’s ability to quickly introduce innovative new technologies into the market; 2) the network effect that exists with the tremendous popularity of Apple phones and services, and its ability to partner with a large number of merchants and financial institutions; and,  3) the enormous resource of Apple’s other businesses, which can subsidize Apple Pay as it competes with PayPal’s present take rates. However, we believe these fears could be overblown.  In our assessment, we take into account several factors, including the market size of this payment technology, iOS’s limited market share, and PayPal’s well established presence in this business. According to Citi Research, transactions through this technology could total around $58 billion by 2017. While large, this figure is still small compared to the overall value of mobile transactions, which could reach $721 billion by 2017 globally, according to Gartner. The upcoming spin-off should also assuage some of these concerns as the split from eBay would allow PayPal to freely partner with other Internet giants like Facebook, Google, Alibaba etc. Seller Policies Have Created Trouble In The Recent Past: The recent tightening of seller policies at eBay has created significant dissatisfaction among sellers. While these changes ensure higher quality control for buyers, they have caused sellers to migrate from eBay to other online marketplaces offered by Amazon, etsy.com, etc. We suspect that thousands of sellers are leaving eBay because of these unfavorable policies, and due to the recent fall in traffic on the site which has caused their profits to drop. eBay does not report these seller metrics publicly. We think this issue could also impact the company’s top-line in the long-run, considering sellers are an essential component of eBay’s value chain, and their mass migration could cause significant decline in product listings and thereby sales. Our  $67 price estimate for eBay’s stock, represents around 20% premium to the current market price. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    A Brief Recap of Avon's Performance in 2014
  • By , 12/17/14
  • tags: AVP EL LRLCY REV
  • Avon Products (NYSE:AVP), the direct selling company of  beauty, household and personal care products, experienced a rough year in 2014.  The company seems to be on a downhill trend, having posted its last profit back in 2011. Avon’s direct selling model through representatives is losing market share to retail outlets and online shopping. In 2014, Avon was adversely impacted by both macroeconomic as well as microeconomic factors. Externally, the grim economic environment weakened Avon’s performance in 2014, especially in the Latin American region, which contributes to over 50% of Avon’s revenues. Internally, the company underwent major management restructuring and attrition of its representative base. In this article, we will recap the major factors that impacted Avon’s performance in 2014. See Our Complete Analysis for Avon Products Here Avon’s Latin American Travails Brazil Latin America contributes to over 50% of Avon’s annual revenues. Within the Latin American region, Brazil is Avon’s single largest market. Brazil is the third-largest beauty market in the world.  This market has had a 10% annual growth rate for the last 17 years, up until 2013, when the growth rate in 2013 was 4.9%. Direct selling contributes to approximately 70% of Brazilian market sales in the skincare, color and fragrance categories. These factors fueled Avon’s erstwhile growth in Brazil. At present Brazil’s economic environment is grim and has still not recovered, as it was expected to do post the World-Cup. Consumer spending has dampened due to grim economic conditions and high household debts. Competition in the personal care market through direct sales as well as retail is intense. Avon’s introduction of the premium color line  LUXE in Q3 2014 suffered due to all these factors. The product pricing was not suitable for an economy where consumer price sensitivity for luxury goods, like cosmetics, was high. However, the management believes that Avon’s Brazilian business will grow in 2015. In 2014, the company has forged strategic alliances with KORRES, a Greek skincare brand, and Coty, a French beauty and personal care company, to provide a boost to the Latin American, and specifically to the Brazilian, market. The details of the partnerships are discussed later in this article. Mexico Sales in Mexico suffered in the first half of 2014, due to attrition in the representative workforce and an unsuitable portfolio price mix. The product portfolio and pricing have since improved,  resulting in an  increase in average orders in Q3 2014, though the representative retention is yet to improve significantly. Hence, the recovery rate in Mexico remained below management’s expectations in Q3 2014. Avon plans to improve the retention rate by helping representatives navigate the first 6 campaign cycles. Earlier, this plan had resulted in significant improvements in representative retention in the UK. Declining Pool of Avon Representatives Avon’s sales structure is dependent on active representatives. The North American base of active representatives is on a gradual decline. This is adversely affecting Avon’s product sales in that region. Avon had nearly 470,000 representatives in 2009, which declined to 314,000 representatives by the end of 2013. Going by the rate of decline in representatives in North America, Avon’s active representative count by 2014 end could stand at about 258,000. This continued double-digit decline in active representatives is likely to weigh on sales and put margins under pressure going forward. Year to date, Avon’s active representative base in Latin America has declined by 4% on a year-on-year basis, primarily due to low retention of new recruits in the first 6 campaign cycles. Similarly, the  representative base in Asia-Pacific declined 9% year to year over the some time interval. The reasons behind Avon’s waning representative base are: Avon’s reorganization of its sales force in Q2 2013, which resulted in the disruption of its sales representatives pool. The recovering North American economy and the subsequent creation of full-time jobs is expected to pile on additional pressure on Avon’s representative base because Avon representatives are usually non-contractual workers. Over the longer term, digital channels such as e-commerce are likely to cannibalize sales from the direct-selling channel for Avon, leading to a reduction in representative base. The company launched its consumer-centric e-commerce platform avon.com in the U.S. in Q3FY14 and intends to expand into other key markets in 2015. Management Reshuffling The company announced corporate restructurings to support its multi-year turnaround plan. The management responsibilities in Latin America have been split into two defined sets of markets which would be overseen by two separate executives. In addition to this, there will be changes in the marketing and sales organization, in Avon’s key markets. Avon’s Chief Financial Officer, Kimberly Ross, resigned in October 2014. The senior management transition added to the company’s existing set of troubles. For 9MFY14, Avon’s sales decreased 11% to $6.51 billion (vs. $7.29 billion in 9MFY13).  Although external factors such as volatile currencies have played their part in declining sales, internal representative churn and lapsed management strategies across geographies have contributed to significant declines in constant currency sales. Avon’s Turnaround Strategies The company plans on improving its supply chain efficiencies, including contract terminations, as well as global headcount reductions, which may result in annualized pre-tax savings of approximately $50 million to $55 million as a part of Avon’s $400 million Cost Savings Initiative. Earlier in February 2014, Avon entered into an alliance with KORRES, the Greek skincare brand, to develop manufacture and market the latter’s products in Latin America. In May 2014, the company partnered with Coty, a pure play beauty company, to market and sell select Coty fragrances through Avon Brazil’s network of 1.5 million independent sales representatives. The company aims to strengthen its presence in its most important sales region, through these initiatives. Avon is reducing its footprint in the Asia-Pacific region, particularly China, where it operates under a beauty boutique model compared to its traditional direct-selling model due to the intensifying competition from local and Korean cosmetics manufacturers. Avon ceased operations in Bolivia, in mid-2014, after a series of weak performances in the region. The company aims at focusing on regions with greater growth potential. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Roche Hopes For Melanoma Therapy Approval
  • By , 12/17/14
  • tags: RHHBY MRK BMY
  • Swiss pharmaceutical giant Roche Holdings (NASDAQ:RHHBY) recently filed an application with the FDA to review its experimental drug Cobimetinib for the treatment of melanoma, in combination with already marketed drug Zelboraf. The therapy is meant to be used for patients who have a BRAF gene mutation which allows melanoma cells to grow. Melanoma is the deadliest form of skin cancer. Even though it accounts for less than 2% of all cancer cases in the U.S., it causes death in a majority cases. It is disturbing that out of the seven most common cancers in the country, only melanoma has shown increase in incidence, going up by 1.9% annually between 2000 and 2009. It is also one of the very few cancers with an increasing mortality rate. Moreover, approximately 86% of melanoma cases can be attributed to exposure to ultra-violet radiation from the Sun, which is something that’s easy to ignore. Considering these facts, there is a great need to address this disease and the demand is likely to be strong. Our current price estimate for Roche stands at $38.54, implying a slight premium to the market price.
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    Declining Unemployment, Strong Job Additions To Drive Paychex's Revenues
  • By , 12/17/14
  • tags: PAYX ADP
  • Paychex (NASDAQ:PAYX), a leading payroll and human resource management company, is set to release its second quarter fiscal 2015 earnings on Friday, December 19 before the market opens. We expect to see an increase in Paychex’s checks per client driven by the decline in the unemployment rate to a six-year low. Also, as the deadline for compliance with the Affordable Care Act regulation approaches, Paychex should see an increase in its client base. In the first quarter, the company reported a 9% year-on-year increase in service revenue, which was at the midpoint of its guidance of 8-10% growth for the fiscal year. An increase in revenue per check and new service offerings at its Payroll and Human Resource (HR) segments helped drive the revenue growth. Net income grew 5%, driving a 7% increase in earnings per share, which reached $0.47 per share. In its earnings release, Paychex reaffirmed its guidance of 8-10% growth in revenue for fiscal 2015. This guidance includes the impact of classification of PEO direct costs as operating expenses.
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    BlackBerry Q3 Preview: Expect Another Quarter Of Transition
  • By , 12/17/14
  • tags: BBRY SSNLF MOBL
  • BlackBerry (NASDAQ:BBRY) is expected to announce its FY Q3 2015 earnings on Friday, December 19, reporting on a quarter that saw the company release the latest version of its mobile device management (MDM) software BES 12, and launch its new flagship phone, he BlackBerry Passport. We largely expect Q3 to be another quarter of transition for the company, with continued declines in service subscribers and sluggish software revenues owing to the EZ Pass promotion. However, we believe that the company could post a smaller sequential loss aided by its restructuring initiatives and a potentially improved performance from the handset division. During the second quarter, the company’s adjusted net losses declined sequentially from around $60 million to $11 million while quarterly revenues fell from around $966 million to around $916 million. In this note, we take a look at what to expect from BlackBerry’s three key business divisions this quarter.
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    The Impact Of Coffee Prices On Kraft Foods Group's Business
  • By , 12/17/14
  • tags: KRFT
  • For a food and beverage (F&B) company such as the Kraft Foods Group (NASDAQ:KRFT), the price of agricultural commodities has a major influence on profitability. This is because commodity costs are a major part of an F&B firm’s cost of goods sold (COGS). Rising COGS brings down the company’s gross margins as well as its earnings before interest, taxes, depreciation and amortization (EBITDA), an important measure of profits from the core business activities of a firm. In this article we take a look at the trends in coffee prices, and how they could impact Kraft’s business. We have a price estimate of $66 For Kraft Foods Group compared to a market price of about $59.
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    FedEx To Enhance Services, Expand Presence In North American E-Commerce Market Through GENCO
  • By , 12/17/14
  • tags: FDX UPS
  • A few days before its second quarter earnings release, FedEx (NYSE:FDX) announced that it will be acquiring GENCO, a leading third-party logistics provider in North America. The deal, the terms of which have not been disclosed, is expected to be completed by the first quarter of 2015. With this acquisition, FedEx will be able to provide end-to-end reverse logistics services to the retail and e-commerce industry, which is one of GENCO’s areas of expertise. FedEx’s GENCO acquisition should also enable it to increase its e-commerce presence in North America, where UPS (NYSE: UPS) is the leading logistics provider for the e-commerce industry.
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    State Street Ups Ante In European ETF Price Wars With Another Round Of Price Cuts
  • By , 12/17/14
  • tags: BLK DB STT
  • Earlier this week,  State Street (NYSE:STT) announced plans to slash the expense ratios for two of its popular European exchange-traded funds (ETFs) by roughly 20%. This move follows a much larger round of price cuts announced by State Street in late September, when the global custody banking and asset management giant lowered the expense ratios of 15 of its core equity and fixed income ETFs. Over the last few quarters, the world’s largest asset managers have been locked in a price war over their ETF  offerings in Europe, as all of them target retail investors in a bid to increase their market shares in the rapidly growing industry. The ETF market in Europe is primarily dominated by BlackRock (NYSE:BLK), Vanguard, Deutsche Asset & Wealth Management (DAWM) – the asset management arm of Deutsche Bank (NYSE:DB) – and Lyxor – a part of Société Générale. State Street’s decision to introduce another round of price cuts shows that it is looking to aggressively grow to be one of the top three ETF providers in Europe.
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    Medtronic-Covidien Deal In Final Stages With Antitrust Approvals In Place
  • By , 12/17/14
  • tags: MDT BSX
  • Medtronic (NYSE: MDT) is set to complete the acquisition of Covidien by early next year as it has received all the required antitrust clearances from about a dozen countries. In the last month, the deal has been approved by the U.S. Federal Trade Commission (FTC), the European Commission, the Chinese Ministry of Commerce, the South Korean Fair Trade Commission and the Canadian Competition Bureau. The only approvals pending are from the Irish government, where Covidien is based, and the companies’ shareholders. Shareholder approval is expected to be granted on January 6, 2015, when the shareholder meetings are scheduled to be held in Minneapolis.  The medical device major also recently announced a revised financing plan for the acquisition, following a notification by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) discouraging tax-avoiding corporate inversion deals. Instead of using its $14 billion cash held mostly in foreign subsidiaries to fund the $16 billion cash component of the $43 billion deal, the company raised $17 billion from a massive commercial bond offering earlier this month. The combined Medtronic-Covidien entity, with a presence in more than 150 countries, is expected to drive more value and improve operational efficiency by offering various healthcare and diagnostic products and services as a package to its customers. Covidien generated over $10 billion in revenue in 2013 compared to Medtronic’s $17 billion, with about 50% of sales coming from outside the U.S. Our  price estimate for Medtronic’s stock is currently around $64, which is about 10% below the market price.
    Elliott Wave Charts Point to Shocking Countertrend for Gold: Steven Hochberg
  • By , 12/17/14
  • tags: GLD NUGT
  • Submitted by The Gold Report as part of our contributors program . Elliott Wave Charts Point to Shocking Countertrend for Gold: Steven Hochberg This interview was conducted by JT Long of The Gold Report. It’s not just surfers who scrutinize wave patterns. Steven Hochberg, chief market analyst at Elliott Wave International, uses the Wave Principle to predict the movements of commodities and the stock market based on a number of factors, including sentiment. In this interview with The Gold Report, he reads the waves and shares their indications that the stock market is headed for a downtrend, while commodities will move up, although not in a direct line. The Gold Report: You have warned that the S&P 500 and NASDAQ are in retreat and that we are entering a bear market that our grandkids will have to live through. What are the signs of that? Steven Hochberg: The retreat hasn’t been very big so far, but we see a couple of signs that its start is imminent. First, we look at all markets through our model, which is called the Wave Principle. It is based on R.N. Elliott’s discovery that waves of social mood, from optimism to pessimism and back to optimism, create specific patterns. We believe the market is at the end of its long rally because that wave pattern is coming to its terminal point. That’s the main indicator. But we also look at other indicators to confirm or refute what we’re seeing. Many indicators are confirming that we’re in the end stages of the rally that started in 2009. Sentiment is one. Sentiment tends to get very extreme at trend reversal points. It is extremely optimistic at highs and extremely pessimistic at lows. The bears shrink down to almost nothing when you’re coming into a rally high. A service called Investors Intelligence tracks the percentage of bulls and bears among advisers. Recently, the bear contingent shrank down to 13.3%, which was the lowest in 27 years. Another indicator is the percentage of money and money market funds relative to assets. That number is at a historic low. That means managers don’t feel that they need to hold anything back in reserve in case of a market decline. They’re fully invested with this market. The exact opposite happens at lows. At the lows in 2002 and 2009, managers had a huge percentage of their money in money market funds, the reason being that the market had been going down and they were scared. Now, we’re at the opposite end. Internally, the market is starting to thin. The rally is narrowing. For example, the small-cap sector, as indicated by the Russell 2000 Index, made its closing high in March 2014, and it has not confirmed the Dow’s rally to a new high or to the NASDAQ. This narrowing is typical at the end of a stock rally, until finally only a couple of sectors are going up. Then, everything rolls over and goes to the downside. That is where we’re arriving at in this cycle. I think the next major move for stocks will be to the downside. TGR: What does this transition look like? Will small caps and large caps be affected differently during the transition? SH: Initially, perhaps, but eventually they will go down together. The small-cap sector, which represents the higher-beta, less-liquid stocks within the overall market, tends to top out a bit sooner. We look at the ratio of small caps to large caps by dividing the Russell 2000 by the Russell 1000 Index. It has been nine months since the Russell 2000 hit its high. Since then, the ratio is down 11%. During that same time, the blue chips have been making higher highs. That ratio has a succession of lower lows and lower highs. It’s in a downtrend. That’s a key signal that the market is thinning and ready to go down. When the blue chips roll over, both will be aligned on the downside. TGR: On Nov. 11, you issued an interim report that said for the first time in three years your charts were indicating that a significant countertrend rally was at hand. What are the Elliott Waves telling you? SH: That was a countertrend rally specific to gold?a fascinating market that we have followed and will continue to follow closely. Gold topped out in September 2011 at a $1,921/ounce ($1,921/oz) spot price and has declined pretty persistently until now. It went sideways in late 2013 into early 2014, but the Elliott Wave pattern that we were following suggested gold would go down again, and it has. We’ve been forecasting these waves of optimism and pessimism as they’ve been unfolding to the downside in gold. For the first time in three years, we were able to count a complete declining Elliott Wave pattern from gold’s 2011 high. That’s why we issued a combined interim report from our two main newsletters, The Elliott Wave Theorist, written by Robert Prechter, and The Elliott Wave Financial Forecast, which I write with my partner, Peter Kendall. This was only the second combined interim report that we’ve put out in our history. We did it because we saw extremes in sentiment that suggested to us the start of an impending gold rally. I think that rally is in its very infancy right now. Ultimately, it’s going to carry gold higher. I think gold has upside potential from here. TGR: You talk about the importance of sentiment in your analysis, but different parts of the investing market act differently. What is the role of small traders versus goldbugs and institutions in both bear and bull rallies? Who turns first? SH: That’s a good question, and it’s interchangeable. We here at Elliott Wave International are goldbugs because we believe that gold?as it has been for centuries?is true money. In the context of our report, which came out two trading days after gold’s recent low, we were referencing goldbugs as investors who were never going to turn bearish on gold; people who were forecasting $5,000/oz, $10,000/oz gold. Eventually, we’ll probably get there, but nothing is straight up. We’re trying to take a more pragmatic approach, a tactical approach based on what the waves tell us. For example, sentiment, which is a big part of the gold sector, had gotten very extreme. Several days before gold hit its all-time high in September 2011, the Daily Sentiment Index, put out by trade-futures.com, moved to a record high of 96% on a five-day average. That means virtually all the traders thought gold was going higher. To us, this extreme ebullience was consistent with a high. Fast forward to today, the Daily Sentiment Index of traders had fallen to a record low of 5%. That was significant. For small traders, the Commodity Futures Trading Commission (CFTC) tracks futures and options traders. The weekly Commitment of Traders Report chops the market into three cohorts: small traders whose positions are so low they really don’t have to report to the CFTC; the large speculators; and the commercials, or the insiders. Each cohort moves in its own ways. For example, when gold was at $1,800/oz in October 2012—which was a countertrend rally high, in other words a lower high than it was in 2011—small traders had moved to the greatest net long in 11 years in futures and options. Even though gold was not at a new high, the small traders were more bullish than they were at the high. Now, small traders have gone from that October 2011 largest net long in 11 years to recently having their largest net short position in 15 years. Gold is down 37% and the small traders are betting it’s going to continue to the downside. Just as they were wrong in October 2012, we think they’re going to be wrong here at this low. TGR: Based on that, what is your target price for gold in 2015? SH: I think a reasonable target price is in the $1,440-1,525/oz range. We’ll be able to refine that as we see the wave structure unfold and do our internal calculations. Based on what the Elliott Waves are showing, I think this is a countertrend rally. Major declines typically have an ABC pattern. You have your A wave down, then you have a B-wave rally that retraces a percentage of the preceding decline and then you go down in a C wave to make what is the final low in an ABC pullback, or decline. We think that November’s low is the A wave, that initial leg down, to be followed by a B-wave rally. The A wave lasted from September 2011 to November 2014. The B wave will probably last well into 2015, if not all year. TGR: What do the charts tell you about silver? SH: Silver will move more or less with gold. As gold rallies in its B wave, silver will rally in its equivalent B wave. A reasonable target price would be around $22.50/oz, maybe up to $26/oz in the countertrend rally. It’s going to take a couple of months to get up there. TGR: Are you also positive on the platinum group metals? SH: Yes, they should go higher, too. So will oil most likely, although we think oil will decline further before the rally. Once that rally gets going, it would not be unreasonable to see oil at $84/barrel, maybe $95. That’s probably a reasonable target in a countertrend rally, but first we have to get a low in place. TGR: Is oil more difficult to predict because there are so many political factors at play? SH: We don’t think that outside factors cause markets to move. We think outside news events are simply the result of socio-psychological forces that have already occurred and have already been reflected in the waves. We think movements are endogenous. They’re internal. As people get more pessimistic or optimistic, their behavior traces out waves. The news reports that you read are simply after-the-fact accounts of people’s emotions, or waves, of optimism and pessimism that have already been expressed. The Elliott Waves look pretty clear in oil, as well as gold and silver. TGR: Is the recent downside in commodities more about the strength of the U.S. dollar than what’s actually happening in the commodities sector? SH: I would say the trends in commodities and oil and trends in the dollar are more coincident than causal. Since May, the commodity markets have been down and the dollar has been rallying very strongly, giving the appearance that it’s all due to the dollar going up and the commodities going down relative to dollars. But all correlations or movements tend to be time dependent. By that I mean there are times when they move apart as they are right now, and there are times when they move together. For example, from January through November 2005, the dollar was rallying; it was up 15%. Commodities in the CRB Index were up 17%. Both were moving together. Today, they’re moving apart. It appears that one is causing the other, but I think they’re really coincident moves at this point. TGR: What do your charts tell you about the prospects for the dollar versus the yen and the euro in 2015? SH: In the longer term, we’re very bullish on the dollar. The dollar made its low in 2008 and has quietly been creeping higher. Longer term, I think the dollar will go higher because we’re going into a deflationary environment. That’s significant for the dollar because most of the debt in the world is denominated in dollars. Debtors will need dollars to pay their debts, whether that happens through repayment, default, restructuring or whatever. Having said that, the dollar has had a major run since May. In terms of the Elliott Wave structure, it appears that we’re in the very latter stages of a five-wave rally from the May low. Just as gold had a five-wave decline and came into a low and is now due for a big B-wave rally. Something similar could be said for the dollar, but in the opposite direction. The dollar is in the late stages of a five-wave rally and sentiment is extreme. The Daily Sentiment Index hit 95% on Nov. 6. That means only 5% of the traders thought the dollar was going to go down; 95% thought it would continue to rally. The fact that this extreme sentiment is occurring in the fifth wave of a five-wave move suggests to us that we’re in for a correction in the dollar. So, while we are bullish longer term, it’s not going to be a straight line. We’ve had a great run-up. We’re due for a correction in the coming months. TGR: In light of these trends, what is the optimum strategy for investors going into 2015? SH: That’s a tough question to answer. The value of a lot of assets goes down in a deflationary environment. The metals are down from 2011, oil is down from 2008, commodities are down from 2008, the 10-year Treasury note is down from a high in July 2012. A lot of markets and asset classes are already deflating. Even though we expect a countertrend rally in some of these assets, it will be a difficult rally to play. When the U.S. stock indexes roll over, there will be an across-the-board deflation in which a lot of assets go down together. Fashioning a strategy is very difficult in this type of environment. We are telling our subscribers to be safe in 2015. If that means cutting back on stocks or increasing short-term Treasury holdings?do what you believe will keep you safe. I think safe means probably short-term Treasuries, even though they’re not paying you anything. If you have to be in stocks, be as defensive as possible. I like gold for money you want to speculate with on a shorter-term basis. A gold rally is likely to unfold over several months. TGR: Steven, thank you for your time and your insights. Readers can get a free copy of “Gold & Silver: How to Use the Wave Principle to Identify Actionable Opportunities” here . Steven Hochberg is chief market analyst for Elliott Wave International. He is also the co-editor of The Elliott Wave Financial Forecast, a monthly financial newsletter, as well as editor of The Short Term Update, a three times a week online market forecasting service. Hochberg began his career with Merrill Lynch & Co. and joined Elliott Wave International in 1994, where he quickly established a stellar reputation providing analysis to large institutional traders and hedge funds. Hochberg is a sought after speaker and has been widely quoted in various media outlets such as USA Today, The Los Angeles Times, The Washington Post, Barron’s,Reuters and Bloomberg and has been interviewed numerous times for his market views by CNBC, MSNBC and Bloomberg Television. Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page. DISCLOSURE: 1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. 2) Steven Hochberg: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer . 5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes. Streetwise – The Gold Report is Copyright
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    OPEC’s Losing Strategy
  • By , 12/17/14
  • tags: EOG XEC
  • Submitted by Wall St. Daily as part of our contributors program OPEC’s Losing Strategy By Karim Rahemtulla, Chief Resource Analyst   Americans better fill up their gas tanks now, because oil prices are going back up soon. Oil broke through $70 per barrel, just as I predicted. Prices may continue to drop to around $50 briefly, but the ultimate resting point will be around $60. In classic American shortsightedness, the nation responded ridiculously by  buying more of the gas-guzzling SUVs and trucks we love . However, in a few months you’ll see the market start to recover and oil prices creep right back up, taking that $2 gas with it. But don’t just take my word for it, look at the evidence . . . Building the Case Oil prices will recover for several reasons. First, low prices are stimulating demand. That will sop up any excess production that’s hanging around. Second, OPEC isn’t the only one that can manipulate prices. The U.S. fracking companies and oil majors are flexible enough to cut back production and put exploration and drilling plans on hold – which, in turn, will add upward pressure to prices. Third, U.S. companies are willing to take desperate measures. The marginal players will close up shop or sell assets at fire-sale prices to survive. And fourth, readers should remember that this is not a time-sensitive game. Much like the natural gas collapse, wells can get shut down and then restarted when prices recover – or when technology improves and reduces costs. The oil under the ground or in the Gulf doesn’t just disappear. The asset is still there and it’s still valuable . . .  at the right time. However, the fifth and most important factor has absolutely nothing to do with the cost of extraction. Cash Wells Running Dry I stand by my argument that low oil prices won’t last because most of the oil-producing nations simply can’t afford it. The chart below shows the fiscal 2014 and 2015 breakeven oil prices for most of the biggest oil-producing countries and OPEC members. As you can see, it’s not a pretty picture for those countries. With the exception of Qatar, Kuwait, and maybe the UAE, most oil-producing countries have been burning through their cash reserves ever since oil prices started dropping. Those cash reserves are the key to the future of oil prices. You see, it’s not enough to just sell oil at whatever price you can fetch when your underlying economy is plunging into a recession and your political system is on the verge of destabilization. Just take a look at Russia. When the country began its incursion into the Ukraine, it held over $550 billion in reserves, and its currency, the ruble, was trading at 30-to-1 compared to the dollar. Since that incursion and the resulting sanctions and plunging oil prices, its reserves have fallen by more than $100 billion, and its currency is now trading 53 rubles to the dollar. High reserves may cushion the fall for some time – maybe months or even a couple of years . . . But in the end, as we’ve seen time and again, countries that blow their cash trying to defend themselves from the inevitable eventually collapse under the weight of their own stupidity. And the OPEC nations have an even bigger problem. Rickety Economics OPEC members have trillions in reserves, but most of that cash is held by the rich Arab nations – Saudi, Qatar, Kuwait, Bahrain, and the UAE. The rest of the nations are economic basket cases. Low oil revenue doesn’t just pose an economic threat to these countries. It could also damage their governments, which rely on huge subsidies (thanks to oil prices) to maintain order and stay in power. As coffers run dry, they face two choices: social and political unrest that could lead to blood in the streets and coup-like rebellion, or cutting back production. For them, it’s not about market share; it’s about survival, which is easier with prices at $80 per barrel or higher. That’s the bet I’m making. It may not happen in six months or even a year, but regardless of where oil finally bottoms, the recovery is inevitable. And “the chase” continues, Karim Rahemtulla The post OPEC’s Losing Strategy appeared first on Wall Street Daily . By Karim Rahemtulla
    Hot ETF Trends to Avoid in 2015
  • By , 12/17/14
  • tags: SPY IVV
  • Submitted by Wall St. Daily as part of our contributors program Hot ETF Trends to Avoid in 2015 By Alan Gula, Chief Income Analyst   Though it may be hard to do, we need to shift our attention away from the twisted wreckage within the energy sector for a second. That’s because, as 2014 winds to an end, investors need to make a plan for 2015. And in order to formulate a strategy, we need to reflect on the past year. Thus, I’ve taken a look back to see where the “hot money” was flowing. If we want to poach the investing herd in 2015, then we’ll have to identify the most popular trades. Analyzing exchange-traded fund (ETF) flows is a great way to do this and can help us avoid overly crowded trades going forward. Here are some of the hottest ETF trends in 2014: 1. The Year of the S&P 500 It’s certainly been a tough year for active managers, and the fund flows echo this difficult stock-picking environment. Year to date, three of the top seven ETFs with the largest fund inflows are S&P 500 Index tracking funds: the iShares Core S&P 500 ( IVV ), Vanguard S&P 500 ( VOO ), and SPDR S&P 500 ( SPY ). Cumulatively, inflows for these funds total nearly $26 billion this year, slightly lower than last year’s $29 billion. 2. Euro Hedged Equity Is All the Rage Everyone hates the euro. So naturally, two of the fastest growing ETFs in 2014 provide exposure to European equities but hedge the exposure to the euro. Introduced in October 2013, the Deutsche X-trackers MSCI Europe Hedged Equity ( DBEU ) grew rapidly in 2014, going from under $10 million in assets to nearly $700 million today. The WisdomTree Europe Hedged Equity ETF ( HEDJ ) actually experienced the ninth-largest fund inflow of all ETFs in 2014, totaling $4.4 billion. The popularity of these euro-hedged funds is reminiscent of the gravitational pull of the WisdomTree Japan Hedged Equity Fund ( DXJ ) in 2013. Year to date, the DXJ has slightly underperformed the S&P 500, but with dramatically larger drawdowns and higher volatility. 3. REITs Getting Bloated Real estate investment trusts (REITs) have been a very popular choice in 2014, as many investors are reaching for yield. The Vanguard REIT ( VNQ ) has experienced the 10 th -largest inflow of any ETF. Also, the Schwab U.S. REIT ( SCHH ) saw strong inflows relative to its smaller size. As I’ve said before, most of the largest REITs, which these ETFs will have the highest exposure to, are expensive. Here’s a sector that you definitely want to go active with, since there are smaller REITs with cheap valuations . 4. Transports on Fire Airlines, railroads, and shipping companies are big beneficiaries from cheaper oil, since gasoline, diesel, and jet fuel are major inputs for these transportation companies. However, the transport stocks were already making headway before the price of oil started to collapse this summer. The iShares Dow Jones Transportation Average ETF ( IYT ) has seen over $1 billion in inflows this year. The SPDR S&P Transportation ETF ( XTN ), which has a healthy 27% allocation to commercial airlines, is one of the fastest growing ETFs in 2014. Its assets have ballooned from around $70 million to over $500 million. This transports trade is quickly becoming a “no lose” proposition for investors… at least in their own minds. 5. Peak MLPs The iPath S&P MLP ETN ( IMLP ) – although technically not an ETF – has displayed perhaps the second most impressive rise, after DBEU. Assets for IMLP have risen from around $50 million to upwards of $750 million. These inflows were surely ill-timed, but the master limited partnership (MLP) craze is a longer-term phenomenon. Fund assets for the JPMorgan Alerian MLP ETF ( AMJ ), which was created in 2009, peaked at around $6.8 billion in September 2014. Naturally, with the price of oil cratering, someone has already yelled fire in this crowded theater. And as I showed earlier this week, many MLPs have questionable payout sustainability . Bottom line: As long as there are markets, there will always be hot money flows. As we cautioned with the iShares iBoxx High Yield Corporate Bond ETF ( HYG ) and the PowerShares Senior Loan Portfolio ( BKLN ) earlier this year, significant and sustained fund inflows tend to indicate unfavorable risk-reward relationships. Safe (and high-yield) investing, Alan Gula, CFA The post Hot ETF Trends to Avoid in 2015 appeared first on Wall Street Daily . By Alan Gula
    Mining Stock Picks for December
  • By , 12/17/14
  • tags: BHP RIO
  • Submitted by J. Frank Sigerson as part of our contributors program . Mining Stock Picks for December The year is almost over, and the time is ripe for investors looking for last-minute ventures. Those looking to diversify their portfolio are probably having a hard time choosing which commodities to invest in, given the movement in the market and the status of both energies and metals. Still, there are always opportunities for those who keep their eyes open. Amidst an impending nickel deficit and an oversupply of coal, some companies have stood out and continue to perform well. Here are some stock picks in the mining sector: Among Sydney miners, Barron’s Asia recommends picking Rio Tinto PLC ( NYSE:RIO ) over BHP Billiton Limited ( NYSE:BHP ). BHP might be the bigger company, but a part of its annual revenue of $73 million comes from oil — about 30% of it. With the current supply glut of oil affecting base prices all over the world, it is predicted that BHP might suffer more loss in the coming months. Rio Tinto, meanwhile, is reaping the advantages because they are using diesel. When the price of oil drops, so does diesel, which means that the cost of producing iron ore decreases, too. According to Paul McTaggart of Credit Suisse, for Rio Tinto, what was once a $5 per ton cost of diesel can fall by $1.50 per ton, which would be beneficial, especially now that the prices of iron ore has dropped from $180 to $70 a ton. McTaggart adds, “Rio is making money hand over fist . . .  Why would anyone in his right mind shut down capacity or sell parts of their iron-ore business with such high margins?” Speaking of being profitable, Amur Minerals Corporation ( AIM:AMC ) in the far eastern Russia is all set to move forward with its Kun-Manie project in Amur Oblast. The company’s license application was recently approved by the Ministry of Natural Resources, and is just waiting for authorization from the country’s prime minister. This news propelled the stock to new levels. Proactive Investors UK declared it as one of the market movers in the past week, with closing prices rising to as much as 28%. Says Robin Young, Chief Executive Officer of Amur Minerals: “We are pleased to inform our shareholders that the licence conversion process continues to move forward with the support of the Russian authorities. Having received approvals from all the required agencies, speaks to the desire of the Russian Government, in accord with Amur, to move this project onto the next phase.” Morgan Stanley adds another Russian name to the list, per a report from Yahoo! Finance : AK Alrosa OAO ( MCX:ALRS ), which specializes in diamonds, from exploration to production. It doesn’t seem to have been affected by the current Russia-Ukraine conflict, and in fact has improved even while the ruble is weak. There is also Oasis Petroleum Inc. ( NYSE:OAS ), which the analysts at Credit Agricole upgraded as a “buy.” The company acquires and develops oil and natural gas, and is based in North Dakota and Montana. Per Stafford Daily, the company has long been trading bullishly, and that it has now given a sell signal. — Sources: http://online.barrons.com/articles/top-mining-stock-pick-rio-tinto-over-bhp-billiton-1417841048 http://www.proactiveinvestors.co.uk/companies/market_reports/75145/market-movers-j-sainsbury-anglo-american-ms-carnival-milestone-amur-minerals-0000.html https://finance.yahoo.com/news/morgan-stanleys-top-international-mining-183749132.html http://stafforddaily.com/hot-stocks-penn-west-petroleum-ltd-usa-nysepwe-whiting-petroleum-corp-nysewll-oasis-petroleum-inc-nyseoas/33311/
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    Wynn Resorts' Stock Price Hits 52-Week Low; Macau Set To Post First Ever Annual Gaming Revenue Decline
  • By , 12/16/14
  • tags: WYNN MGM LVS
  • Wynn Resorts (NASDAQ:WYNN) stock price hit 52-week low of $144.85 yesterday amid a continued decline in Macau gaming. Other casino operators such as Las Vegas Sands (NYSE:LVS) and MGM Resorts’ (NYSE:MGM) stock prices are also trading close to their 52-week lows. Wynn’s stock price has corrected by more than 20% since the company last reported its earnings in October. The gaming revenues in the world’s largest gambling hub dropped by 20% for the month of November, reflecting the sixth consecutive monthly decline in Macau gaming. With the November decline, casino revenues are now flat as compared to the prior year and are poised to post the first ever yearly decline. The first two weeks data for December gaming revenues has come in much lower at 753 million Macau pataca, down from the average daily run rate of 809 million pataca in November. The decline in December could be far worse around 30% and this has led to a wave of selling in casino stocks. The decline can be attributed to the government’s crackdown on corruption, which has led high rollers to stay away from the gaming tables. Moreover, tighter visa policies for Chinese travelling to Macau and new smoking restrictions at the casinos are adding to the woes. Macau VIP gaming contributes around 35% to Wynn’s stock value, according to our estimates. We are eager to see how VIP gaming trends in the coming months. Sheldon Adelson, CEO of Las Vegas Sands stated that the rebound in gaming might come after February of 2015. Our current estimate for Wynn’s Macau VIP gaming gross revenues stands at $3.52 billion for 2014, representing a 5% decline over the previous year. We currently have a $186 price estimate for Wynn Resorts, which is more than 25% ahead of the current market price. We project the company’s 2014 gross revenues at around $7 billion, with an adjusted EPS of $8.54. This compares to a consensus EPS estimate of around $8.20 according to Reuters.
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    Urban Outfitters: Does Black Friday Slowdown Indicate Holiday Sales Weakness?
  • By , 12/16/14
  • tags: URBN ANF AEO
  • Holiday season is the most important time of the year for apparel retailers such as Urban Outfitters (NASDAQ:URBN), as they can earn close to 20% of their annual revenues during the months of November and December, when buyers open up their wallets in a festive mood. Historically, one day shopping events such as Black Friday and Cyber Monday have played a crucial role in driving store traffic, which has resulted in significant growth in retail sales on these particular days. However, recent sales data shows that this is no longer the case. Retail sales during the Black Friday weekend fell 11%, as retailers’ aggressive discounts and offers failed to entice customers. The National Retail Federation (NRF) expected 140.1 million customers at brick-and-mortar stores during the Black Friday weekend, down from 140.3 million in the year ago period. Instead, only 133.7 million shoppers showed up and they too spent less. Consumer spending during the weekend fell 11%, raising concerns that despite the improvement in economic conditions, buyers are not spending freely. However, this does not indicate that the ongoing holiday season will be weak on account of macro-economic factors. It simply reflects the change in consumers’ spending patterns. Our price estimate for Urban Outfitters at $42.5, implies a premium of about 30% to the current market price. See our complete analysis for Urban Outfitters Buyers Know that Discounts aren’t Exclusive to One Day Sales Events While the Black Friday slowdown indicates retail weakness on the outside, NRF believes that fall in foot traffic and consumer spending during the weekend indicates that consumers were confident enough to ignore the initial wave of promotions. Competition in the saturated U.S. retail market is fierce and buyers have limited their impulse spending in the aftermath of the economic downturn. Due to this, retailers across the industry have been relying on heavy traffic driving promotional activities throughout the year, and the holiday season is no exception. In fact, retailers get more aggressive on discounts during the holiday season, in order to capture a sizable share of consumer spending. Interestingly, several retailers launch their holiday products a month before the season even starts, in an attempt to gain a competitive advantage over their peers. Hence, shoppers know that they will get attractive deals even if they skip one day sales events, when stores are usually crowded. This is evident from the fact that overall retail sales and apparel sales in November improved 4%, and NRF maintained its 4.1% retail sales growth forecast for the holiday season, despite the significant sales decline over the Black Friday weekend. In a conference call, NRF Chief Executive said that “the holiday season and the weekend are a marathon, not a sprint.” Buyers Prefer Online Channel over Physical Stores Another factor that contributed to traffic decline during the Black Friday weekend is the gradual customer shift to online channel. ShopperTrak reported a few of months back that foot traffic in U.S. stores had declined by close to 5% in almost every month of the preceding two years. This was the case on Black Friday as well, when store traffic fell by 5% over the weekend, and online sales improved 9.5%. Despite a decline in foot traffic, retail and apparel sales during November increased by 4%, and they are expected to go up by a similar amount in December as well. This clearly indicates that buyers are switching to the online channel (where products are usually cheaper) and are keeping the value and volume growth afloat. However, it must be noted that online sales growth during Black Friday (9.5%) and Cyber Monday (9%) was significantly slower than the growth forecast (16%) for the entire season. This clearly indicates that buyers are indeed delaying their holiday shopping, even through the web channel. What This Means For Urban Outfitters Out of all the segments of the retail sector, apparel is the most competitive one. There are a number of multi-brand and specialty retail chains in the country, that are competing over product designs and prices. Urban Outfitters is among the more popular specialty apparel chains in the U.S., who had been resilient to the edgy retail environment until a year back. Its growth faltered this year as its namesake brand was unable to deliver compelling merchandise due to certain off-pitch fashion calls. Even though the retailer’s e-commerce revenues increased considerably during the first three quarters of 2014 (average ~40%), it did not have a material impact on results, because the segment did not contribute much to overall revenues. The recent industry-wide sales data and trends indicate that Urban Outfitters will have to remain promotional throughout the season, to take advantage of the anticipated growth in retail sales during November and December. Also, since online retail spending growth is expected to significantly outpace overall retail sales growth, Urban Outfitters needs to effectively leverage its omni-channel platform to drive its web traffic to stores. Let’s look at what growth Urban Outfitters can attain during the season. Overall retail sales grew by 3.1% in last year’s holiday season (November and December 2013), and net apparel and accessories sales increased by 2.3% during the same period. Sales in the apparel sector lagged overall retail growth by almost 80 basis points. Urban Outfitters reported sales of $716 million for the holiday season 2013, while overall apparel and accessories market during November and December stood at $41.61 billion. This gives us a market share for Urban Outfitters during 2013 holidays of 1.72%. This year, based on 4% growth in apparel sales in November and NRF’s forecast of 4.1% retail sales growth for the season, we assume growth in apparel and accessories sales for the two month period to trail the retail market growth by a margin of 50 basis points. This implies that apparel sales can increase by around 3.6% in November and December 2014. This gives a potential apparel market size of $43.10 billion for the holiday season of 2014. To calculate Urban Outfitters’ sales during the season, we assume that the company’s market share will decline slightly, due to weakness in its namesake brand and robust growth in sales of fast-fashion brands. Assuming Urban Outfitters’ market share at 1.70%, we arrive at an estimated sales figure of $733 million, which reflects a year over year growth of almost 2.8%. Although the growth potential in revenues is positive, it is significantly below what the company registered in the year ago period. Urban Outfitters’ revenue growth during the holiday season of 2013 at 8% was considerably ahead of the industry growth rate (2.3%). However, it appears that the company won’t be able to outpace the industry growth this year, due to increased competition from fast-fashion brands and its mainline brand weakness. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
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    Earnings Preview: Higher Unit Prices, Shift To Higher Margin Businesses To Drive Nike's Growth
  • By , 12/16/14
  • tags: NKE UA LULU
  • Sports giant Nike (NYSE:NKE) is scheduled to report its earnings for the second quarter of fiscal 2015 on Thursday, December 18th. In the previous quarter, the company recorded a 15% revenue growth over the same quarter in the previous fiscal period, along with an expansion in gross margin of 170 basis points. Nike delivered strong growth across its product portfolio in fiscal 2014 and we expect these strategies to continue delivering growth in fiscal 2015. However, the company expects the  momentum to slow down in the second quarter of fiscal 2015.  Additionally, incremental investments in the company’s Direct to Consumer business, should help boost the operating margins of the company. Nike has guided for a high single-digit growth in revenues for the second quarter of fiscal 2015, with a 120-150 basis point expansion in gross margin, on account of a shift to higher margin products in the sales mix and improved performance of its higher margin businesses. The company expects its overhead expenses to rise owing to investments undertaken by the company in its DTC business and e-commerce channel. We expect the company’s earnings to be in line with its guidance for the reasons cited by the company. See our complete analysis for Nike Recap of Q1 FY15 Results In the first quarter of Fiscal 2015, Nike’s revenues from continuing operations were up by 15% on a reported and currency neutral basis. Gross margin increased 170 basis points to 46.6 %, driven by a sales mix of higher margin products and businesses, higher average prices, lower input costs, and continued strength in the higher margin Direct-to-Consumer business. The company’s strong performance in Q1 2015 was underscored by high growth in North America and Europe. High demand in running, basketball, and football categories continue to fuel the growth momentum for Nike. The company’s performance in China also provided much reason for cheer as the revenue from the region grew by 18% on a currency neutral basis in Q1 2015 compared with the 2% growth in the previous quarter. The company’s outlook on this market in 2015 continues to be optimistic. Revenue for Nike Brands from the DTC channel grew 30% driven by 15% comparable store growth and an impressive 70% growth in online sales. Regional Performances North America represents the biggest market for Nike, accounting for ~40% of its revenues. The company is the market leader in the North American athletic footwear market, with nearly 60% market share. Moreover, sales in the footwear category are driven by the basketball category, which has higher margins than other footwear categories. Nike’s strong footwear performance is based on using endorsements by iconic figures such as Michael Jordan and Kobe Bryant to sell its products. New endorsement deals, such as those with Lebron James and Kevin Durant, should help Nike retain the same strength over the coming quarters. Additionally, the strength of the company’s growing Direct-to-Consumer business should ensure that sales in this region remain solid. Emerging markets (excluding China) revenue grew by 10% in the previous quarter. The growth rate was lower than expected due to the weakening of the Brazilian economy and supply chain issues faced by the company in Mexico. Emerging markets provide long-term growth opportunity for Nike, and the company will leverage international sporting events such as the 2016 Summer Olympics in Brazil to drive its future sales. With growing economic prosperity in the region, Central & Eastern Europe represents another fast growing market for Nike. The company reported a sales jump of 7% in the first quarter with futures orders growing at a promising 11% (in constant currency terms) at the end of Q1. Therefore, we believe this region will continue to be a strong growth driver for Nike in the near future. China is expected to hold the key to Nike’s future growth, owing to its large population and a fast growing economy. However, Nike’s Chinese sales have been hit in the recent past due to ineffective brand positioning, which led to a long drawn out process of clearing out excess inventory by offering discounts. The company is actively addressing this situation by focusing its assortment with a greater level of precision on sports and products that are most preferred by Chinese consumers. Nike has also set up new distribution centers and increased its marketing capacity in the region. The sales figure in the face of this restructuring process will be a key indicator of Nike’s health in China. In an encouraging sign, Nike’s revenues from  Greater China rose 18% in Q1.However, the trajectory of growth in sales from Greater China is unlikely to be linear, as shown by only 5% growth in reported future orders. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    VLKAY Logo
    Volkswagen Bets On New Technology To Take On Tesla
  • By , 12/16/14
  • tags: VOLKSWAGEN-AG VLKAY TSLA GM F TM TTM DAI
  • Volkswagen AG (OTCMKTS:VLKAY) is one of the largest automakers in the world, expected to reach record sales of 10 million annual vehicle units this year. As the world pushes for cleaner technologies and environmentally-viable modes of transport with stricter emission standards, the demand for electrically-powered vehicles has rapidly increased. Although the percentage contribution of plug-in electric vehicles (PEVs) to the net global vehicle sales remains next to nothing at present, the PEV market is estimated to grow at a CAGR of almost 25% through 2023, outpacing the expected 2.6% annual growth for the overall light-duty vehicle market. This potential growth has prompted automakers around the world to dive into the electric vehicle space, but how much of this growth could be captured by Volkswagen? We have a  $44 price estimate for Volkswagen AG, which is roughly 3% above the current market price. See Our Complete Analysis For Volkswagen AG Volkswagen launched its e-Golf, an all-electric car, in the U.S. at the tail-end of October, and its line-up in Europe, comprising the e-Up!, e-Golf, and the newly launched Audi A3 e-tron, holds 8% market share. However, the German automaker’s supremacy in selling vehicles powered by traditional internal combustion engines hasn’t been mirrored in the electric vehicle segment. Volkswagen is still selling much fewer PEVs than Nissan, BMW, Ford, GM, and Tesla, but the company is looking to change that. Volkswagen is looking to launch over twenty electric and plug-in hybrid electric vehicles in China, its single largest market, over the next few years, ranging from small-sized cars to large SUVs. The German auto giant is not only looking to launch more electrically-powered vehicles in the future, but has also invested in a new battery technology that could potentially shake-up the PEV market. Volkswagen Buys Stake In QuantumScape Volkswagen Group of America has bought a 5% stake in QuantumScape Corporation, a battery start-up, aiming to develop a new energy-storage technology that could more than triple the range of an electric car. Despite the evident benefits of purchasing an electric vehicle- including lower running costs, as compared to gasoline-powered engines, low battery prices and provision of subsidies and other government incentives in some countries, the PEV market still remains massively under-penetrated. In addition to the absence of a well established battery-charging infrastructure in most countries, electric vehicle sales still remain low due to small electric ranges. Volkswagen is looking to be the solution to the low-electric-range problem, and take on the likes of Tesla in the PEV market. QuantumScape is working on solid-state batteries as a substitute for the lithium-ion technology, which is used in many electric vehicles today. By doing so, the company believes the range of an electric car could be extended to nearly 430 miles, more than the present day industry-leading ranges of around 265-300 miles for the Tesla Model S. Another advantage of the solid-state batteries is that these are burn resistant, boosting the safety aspects of electric vehicles using such battery packs. Last year, three Model S collisions that led to car fires elicited consumer concerns over the safety of the highly popular luxury sedan. Besides the new battery technology, Volkswagen’s luxury division Audi also plans to develop an all-electric car with a Tesla-like electric range of around 280 miles by 2017. Earlier this year, Audi was also rumored to be developing an electric version of the crossover SUV Q8, with a range of 370 miles, which would compete with the Tesla Model X, scheduled to launch by Q3 next year. EV Sales Could Add To U.S. Sales Developing new electric cars with better ranges could boost Volkswagen’s U.S. business. The U.S. is the world’s largest PEV market, with sales crossing 100,000 units through November, a 22% year-over-year improvement. Volkswagen’s deliveries rose 4.6% through November (excluding figures for commercial vehicle divisions Scania and MAN), but sales in the U.S. declined 2.6% during this period, despite the 5% rise in the country’s automotive market. Volkswagen’s disappointing U.S. volume sales are mainly on the back of an 11% fall in sales for its own branded passenger cars, which form over 60% of the group’s net sales in the U.S., mainly due to negative customer perception, high prices of the imported models, and customer loyalty towards domestic car companies such as GM and Ford. If Volkswagen manages to get the solid-state battery technology up and running in cars, the new technology might give an edge to Volkswagen in the electric vehicle segment, and in turn boost the company’s U.S. sales. However, relying on the small PEV segment to revive Volkswagen’s overall U.S. sales might be over-ambitious as of now. Electric car sales are still negligibly small, even in the U.S., and are expected to impact the company’s overall volume figures only in the long run, depending on how the demand for PEVs grows. The new battery technology is only in the initial testing stage as of now, and the tests to show if the system is viable for cars are expected to be completed not before the end of next year. Whether Volkswagen manages to threaten Tesla’s technological supremacy in the PEV market remains to be seen, but the auto industry will keep a close eye on the development of the new solid-state batteries, which could potentially revolutionize the electric car market. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    PFE Logo
    Pfizer's Acquisition Strategy: Will Pfizer Still Go For A Big Acquisition? (Part 1 of 2)
  • By , 12/16/14
  • tags: PFE MRK BMY
  • We believe that  Pfizer (NYSE:PFE), which is still the largest pharmaceutical firm in the U.S., is at the cusp of making a major strategic decision. The company is facing strong competition from generics which has resulted in a sharp revenue delcine in recent years. Its recently failed bid to acquire AstraZeneca to revive the growth and reduce the costs does beg the question:  will the pharmaceutical giant attempt another big acquisition or will smaller acquisitions and collaborations suffice? If the answer to this question is ‘big acquisition’, then which companies can be potential targets besides AstraZeneca? Based on the company’s history, its strategic focus and management philosophy, we believe that a big acquisition may be in the cards. In this analysis we will touch upon these points, and follow our post with another analysis in near future discussing potential acquisition candidates. Our price estimate for Pfizer stands at $35, implying a premium of about 15% to the market price.
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